Is India's budget foreign investor-friendly?

India’s latest capital gains tax has seen investors deserting the country. But are they ignoring the opportunities that still exist? N Chandra Mohan reports.

India’s 2018-19 union budget of February 1 has had an immediate impact on foreign portfolio investors with its announcement of a long-term capital gains tax. The Sensex has lost 1760 points in four trading sessions since the budget was announced as foreign portfolio investors stampeded for the exit, concerned about the rising costs of investing in India.

Besides an existing short-term capital gains tax of 15% and a securities transaction tax (STT), the country now has a long-term capital gains tax of 10%. This tax will be introduced from April 1 and will use January 31, 2018 as the benchmark for investments.

The big question is: will the finance ministry roll back this tax or dump the STT to mollify investors if the stock market keeps tanking? It looks unlikely for now, as the ministry has blamed adverse global cues for the stock market downturn.

It says the rationale for the long-term capital gains tax is that the existing tax regime is “inherently biased against manufacturing and encouraged diversion of investments to financial assets”. The government expects to raise Rs200bn ($3.1bn) to fund its various welfare schemes, including universal healthcare.

New taxes aside, foreign investors may well be interested in the vastly increased outlay on railways and roads. Finance minister Arun Jaitley said India required funding of Rs50,000bn to connect and integrate the country with a network of roads, airports, ports, railways and inland waterways. The government is also seeking to expand airport infrastructure fivefold to handle 1 billion trips a year.

The bulk of infrastructure spending is on the railways and there is a policy focus to accelerate electrification of tracks. As railway infrastructure is open for 100% FDI, there are big opportunities for global firms.

Foreign investors are also eyeing opportunities in India’s booming food processing sector. The budget has doubled the allocation for this sector and has proposed 42 state-of-the-art food-processing zones, which looks likely to attract FDI. With India’s sizeable middle class and faster pace of urbanisation, there are huge opportunities in providing processed food to this market.

Along the value chain, there are significant opportunities for contract farming, raw material sourcing and creating farm-to-fork linkages, especially for companies such as Amazon, which is investing big in food retail. It is also an opportunity for global supermarket chains to outsource from the country.

N Chandra Mohan is an economic and business commentator based in New Delhi.

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